Hello from Europe.

Fairly quiet day across markets as everyone is waiting for the US-China trade deal to be confirmed, which is taking much longer than the rhetoric from officials suggested yesterday. Talks were described as both quick and result-bearing, but markets are likely starting to discount the possibility that negotiations aren’t going as smoothly as expected, even though the Trump administration desperately needs—and wants—a victory, which such a deal could deliver.

From what we can gather on both the Chinese and the US economies, the Chinese economy has actually been holding up slightly better, meaning that it’s not unlikely China has come with more requirements than Trump and his ilk initially expected. That could explain why negotiations have drawn out.

We still expect a rather benign deal (from a market perspective) soon, although talks are admittedly progressing slower than anticipated. While markets could justifiably begin to discount the deal not being completed in the swift and simple manner originally presented, risk assets continue to drift higher while bonds drift lower—exactly the reflationary environment we’ve been calling for over the past couple of weeks.

We have the 10-year (Wednesday) and 30-year (Thursday) Treasury auctions coming up this week, serving as the big events in the bond space. It’s the first auction for the 30-year point since early May and will be a major test of how worried markets are about the loss of future tariff revenue if deals are struck, and the potential rise in spending due to the Big Beautiful Bill. As elaborated yesterday, most forecasts for the intertemporal increase in spending likely underestimate the surge, given the urge to spend as much as possible while in power. The question now is whether markets are fully aware of these risks.

While bond yields got a bit of relief last week as economic surprises moved lower after the ISM, ADP, and NFP prints, there’s still plenty of evidence suggesting the direction for yields is up—not least due to the lagged effect of the weaker USD in Q1 and Q2. The NFIB survey for May more or less confirmed the reflationary trends we’ve been highlighting, with the headline index rising, sales expectations improving, and both price and compensation plans ticking up. Positive macro surprises are slowly but surely returning, which will drag bond yields higher.

On top of that, systematic inflows into bonds from CTAs are now starting to reverse. Combined with fiscal worries (even if they’ve faded slightly), this creates a backdrop of systematic outflows, making it hard for bond yields to fall meaningfully unless economic data deteriorates further.

Chart 1a: Bond yields got a relief rally after the negative surprises last week